Free Money for College Savings

There are a variety of national, state and local programs that
encourage families to save for college by providing families with free
money. There are two main types of such programs:

1. Birthday Present. Such programs provide contributions of
$100 to $1,000 as seed money in the college savings plan when the
parents open a new 529 college savings plan before the child’s
first birthday. These programs usually do not have income restrictions.

2. Matching Grants. Such programs match contributions by low
and moderate income families to their children’s 529 college
savings plans.

In addition, about three dozen states have a
state income tax deduction
for contributions to the state’s 529 college savings plan.

Generally, either the account owner or the beneficiary must be a state
resident to qualify for the matching grant program. The match must be
used for qualified higher education expenses or it will be forfeited.
The match will also be forfeited if the beneficiary is changed.
Families must apply annually to receive a match.

For more information on this topic, see the
College Savings Initiative,
a joint project of the New America Foundation and the Center for
Social Development.

Individual Development Accounts

Individual Development Accounts (IDA)
are special savings accounts that help low and moderate income
families save by matching their contributions. They are typically operated as
partnerships between local non-profit organizations and local banks.
There are more than 500
IDA programs in the US, each with different criteria. The Corporation
for Enterprise Development (CFED) maintains
a directory of IDA programs.
Most IDA programs are designed to help low and moderate income
families save for college or job training, purchase a first home or
start a small business. On average, about a fifth of IDA program funds
are used by participants to pay for education. IDA program
participants are twice as likely to enroll in college. Typically the
IDA programs will match contributions dollar for dollar up to an
annual limit for one to three years. Some will match contributions at
a $2 for $1 or $3 for $1 rate. The IDA programs provide (and require)
the participants to receive free financial literacy training.
The US Department of Health and Human Services (HHS) is the largest
funder of IDA programs through
Assets for
Independence (AFI). These programs receive up to $2,000 in
federal matching funds per participant, without affecting SSI
benefits. Participants in AFI-funded programs must be eligible for
TANF or EITC or have income below 200% of the poverty line.